How 'Free' Has Even More Value Than People Think It Should

from the and-so-it-goes dept

Earlier this year, we pointed to some of the psychological reasoning for those in the RIAA/MPAA's of the world (and their supporters) for arguing against giving stuff away for free, even when there was evidence that they could make more money doing so. In that case, psychological experiments showed that people don't act rationally when they think something is "unfair." That is, they'll take a worse absolute result, just to make sure that they're relatively better off.

Now there's a new book that just came out that highlights a related irrationality. This one is by behavioral economist Dan Ariely. Someone had told me a year ago to look out for Ariely's book, which I had forgotten about, but now that it's out, it appears to include discussions on some very interesting experiments. If you listen to the audio interview at that link, Ariely discusses an experiment he ran with children at Halloween. He first gave them all three Hershey kisses. Then he held up two Snickers bars -- one tiny one and one large one. He offered to trade them the small one for one kiss and the large one for two kisses. Most kids quickly made the trade for the larger Snickers bar -- which is a perfectly rational move.

He then changed the terms of the experiment. He offered to give kids the small Snickers bar for "free" or the large one for one Hershey kiss. Most kids now took the free small Snickers bar -- even though they are worse off in that case. Having two Hersheys kisses and the big Snickers bar providers more chocolate than three kisses and the small bar -- but the impact of "free" got them even more interested. Ariely ran more similar experiments (economist Tyler Cowen wrote about one recently) and found that again and again people overpay for free.

This is certainly an interesting finding, given all that we talk about the use of free in economics. If anything, this (bizarrely, I'll admit) makes the case even stronger for using free as a part of any business model. It suggests that people value something that's offered for free more than they should. That has enormous implications for the promotional value of "free." If you're using it that way, it actually increases the value relative to other things, despite the myth some people still have that if something is "free" it means it has no value. Anyway, Ariely's book, Predictably Irrational is now available. Ariely has also put up a blog about the book, though there's not much info there just yet.

Reader Comments

Perceived values of free

I used to work in the IT dept. at a potato chip/crisp factory. One day a bunch of workers were resurfacing the road outside the factory and the CEO went out to talk to them and they ended up laying down a few grand worth of tarmac on the car park in exchange for 3 or 4 boxes of chips/crisps worth about £5 a box. Admitedly it wasn't their tarmac but they would have probably lost their job if they had been found out but the lure of all those "free" potato chips/crisps was too tempting.

Sometimes research is good to quantify, in a controlled way, what we all know from experience to be true.
So I don't think we should be surprised about this. So most of what follows is based on my own feelings/experiences

1) I think partly the reason we over value FREE is the percieved altruism of giving away something for free.

A company seems much more community oriented, less greedy, and all around more likeable if they give away somethinhg for free.

2) In general, people seek approval.. so if they get something for FREE from a company, they feel a small bit of obligation to purchase something, if they correctly assume the company is giving away for free to boost their business, otherwise the person feels they are taking advantage.

This is why if a company that I have no intention of doing business with is giving away free stuff, I generally turn it down. Just recently, the local newspaper was giving away free copies to increase readership. I didn't want to feel obligated to buy a subscription if I took one, so I declined.

What I'm getting at is company's already KNOW the POWER for FREE, both as good-will gesture and to create obligation.
It's the Lawyers and Executives that are soo far removed from the community that they feel to realize this universal truth.

It's unfair

I get into the free/file-sharing arguments with so many people who themselves want to go into entertainment and software and always say how unfair it would be to not get paid for their work. I of course point them to television which has always been free. There is some idea that people in entertainment or software are entitled to money. Even if you work hard, you aren't guaranteed fair compensation. It's not about work hard, it's about working smart.

Re: It's unfair

RVB is a good example of a start up running on the free business model and Dilbert is a good example of a pre-established business that switched to free. And Radio started out as free, but that's just like broadcast TV.

Another example would be how the lure of free handsets makes people buy into relatively long and expensive contracts. In many cases, a quick math calculation would show that many of mobile phone consumers are much better off forking out the full amount for the handset and sticking with pay as you go type alternatives, but won't, because of convenience and the mistaken impression that they are getting stuff for free.

This study doesn't say anything about free vs pay

The study on Kisses vs Snickers doesn't support the allegation that people "overpay for free." The kids didn't pay anything. They received free candy and then decided whether to trade for different (albeit bigger) candy. You seem to be arguing that they overpaid for the small snickers. But - in the end - they paid nothing for any of the candy. How does this help as the basis for a business model?

Compare the candy example to video/audio downloads. Kisses are audio song files, small snickers are music video files, and large snickers are movie video files. I give you three free songs, and then offer you either (1) a music video file for free or (2) a movie video file in exchange for one of the songs. You end up with three songs and a music video for free, or two songs and a movie video for free. If I am a song/video content provider/creator, when do I get paid? I just gave away everything (because it's Halloween), but made no money.

Maybe you will come back and buy another song or maybe you will buy another music video, if you liked the first two or three songs. What difference is that compared to the existing model of just giving away candy/music/video samples? Adding on the idea of trading for more/different free samples doesn't make me any more money than just giving away the initial samples.

Re: This study doesn't say anything about free vs

This is not a direct analogy about songs or whatever. It's about psychology: People are willing to take a small lagniappe for free, when they would actually directly benefit more by doing something else. It may be possible to take advantage of this curious phenomenon of human behavior in your business. Or you could, you know, keep saying "that won't work" in blog comments. I'm sure that will get you somewhere.

Re: This study doesn't say anything about free vs

"The study on Kisses vs Snickers doesn't support the allegation that people 'overpay for free.'"

"Adding on the idea of trading for more/different free samples doesn't make me any more money"

It was a simple experiment in perceived value. The kids placed more value on the smaller snickers bar because they didn't have to give up anything they already had. You're read too much into an incredibly simplistic example.

Re: This study doesn't say anything about free vs

If you read the other posts here on the economics iof free, you'll find that what's actually being said is that you give something away for free in order to entice people to buy something else. You can't just give things away and expect to make money. You can't give away music for free *and* expect them to buy music. But you can give music away and expect people to buy concert tickets.

In fact, if you give one song to one person, and that person shares it with everyone he knows, you just promoted yourself to several dozens of people for the cost of one digital copy. If you have good music (and I'm sure you do), many of those dozens will become fans. And fans spend money on the bands they like. If they aren't spending it on CDs or digital music, they'll spend it on concerts and T-shirts and stuff. The point is, they'll spend it.

It's also useful to note that you can't give just anything away, either, and expect it to be successful. If it costs you more to give away the freebie than you can reasonable expect to recoup elsewhere, it's a bad idea. Digital content, as noted, has a way of reproducing itself, at no additional cost to you. Your fans will create more fans without direct action by you.

And, of course, the benefit is that you will not be fighting against what the technology allows or what consumers want: you will be leveraging those things to your advantage. But this has all been said before.

Creative Commons

Vaguely related: I've noticed that people have MUCH more respect for CC licenses than traditional copyrights. I had one guy use my CC licensed video as source for a web comic. He noted the source for the images *and the audio* even though he didn't actually use any audio.

well, first example is would you rather have 2 kisses and 1 small snickers or 1 kiss and 1 large snickers while the second is 3 kisses and a small snickers or 2 kisses and a large kiss.

but it's not.

they "earned" the kisses. when the snickers come into play, they are either bought or given for free.

are 2 kisses for a large snickers better than 1 kiss for a small one? that's the first example

the next is a kiss and a small snickers worth more than a large snickers?

the kids had something, and were offered something else "for free" or they could pay for something else. and most wanted "free" because they still came out with more AND didn't spend anything. even though in the end, a payment of 1 kiss would yield more than saving the kiss and getting a free small snickers.

and most people are like that. they would take somethng of "lesser" value in order not to spend anything.

think of the joke about the "dumb boy" ad the soda shop. the other boys picked on him..by saying i'll give you a big nickle or a small dime, and the "dumb boy" always said the nickle because it's bigger. the other kids would run away and make fun of the kid. the shop owner went to the boy and said, you know the dime is worth more, but why do you take the nickle and have them make fun ofyou? the boy replied, if i took the dime, they'd stop asking me, and so far i've made $25 this month.

but yeah, most people look for the short run...insead of the long run. take laundramats for example. my washer and dryer went. so i ended up spending 15 bucks for machines at the laundramat. i do laundry every 2 weeks, so that's 390 bucks in a year. 800 over 2. that covers the cost of a decent washer/dryer that would last 5+ years. so why are there people that would spend 400 bucks a year when they get a washer/dryer and pay minimal utility fees and save 1000 bucks in the same 5 years?

Off the subject of free...

Getting off the subject of free for a minute...

I think the experiment with the kids is a good example of short-term versus long-term thinking.
If the kids took the free small Snickers, they have more candy in quantity (3 bars). If they "paid" for the large Snickers, the would have fewer candy bars, but much more chocolate.

Here's another example:
Suppose you just moved into an apartment, signed a 1-year lease, and you need a washer. You could either:
A) Rent a washer for $30 a month for a year.
B) Purchase a basic washer for $300.

Which do you do? $30 a month sounds like a better deal since you only have to pay $30 instead of $300.
But over the course of one year, the total comes to $360, which is $60 more than if you had bought a washer.

If you renew your apartment lease for another year and stick with the same dryer, you have to pay another $360 for a year's rental.

So, two years in the apartment, you will pay:
A) $720 for the rental.
B) $300 for buying a washer.

Yet many people will go for the rental option because it's cheaper *right now*.

yeah

Try copying the author's content and publishing a book for profit...yeah, those copyright laws gotta go.

This discussion regarding MP3s for free is always very narrowly focused on performing musicians. Increase the scope beyond bands who make it up in "performance" revenue, "schwag" upsells, subscriptions, etc...then it completely falls apart.

I've yet to see any *valid* business case that addresses the issues with composers, writers, or producers who don't perform.

Re: yeah

Odd. We've pointed to responses to all of your points in the past. So coming here and saying we haven't is either ignorance or willful misrepresentation.

Try copying the author's content and publishing a book for profit...yeah, those copyright laws gotta go.

Actually, we've shown that the "official" versions will outsell copied versions, so your point doesn't stand. Take a look at the 9/11 Commission report publishing history and what sold and what didn't to s how that this argument is somewhat meaningless on your part. The official publication sells quite well in spite of copies.

This discussion regarding MP3s for free is always very narrowly focused on performing musicians. Increase the scope beyond bands who make it up in "performance" revenue, "schwag" upsells, subscriptions, etc...then it completely falls apart.

Actually, it does not, as we've shown here time and time again. As long as you can find the scarce goods that are inevitably tied to the infinite goods, there's a business model. It's really not that hard to find them either.

I've yet to see any *valid* business case that addresses the issues with composers, writers, or producers who don't perform.

Hmm. We've pointed out a bunch. You might want to try the search engine...

"Anonymous Coward" is completely missing the point. The point is people are willing to give up far more than they ever rationally should just to feel as if they got something for "free".

For example, during giveaways people often wait in line for hours to get something for "free" which is probably not worth waiting in line for hours.

Yet, if the price was increased to 2 cents (which, for all purposes, is virtually free) almost nobody would wait in line for that long. Even though there is essentially no difference, because people feel like they are getting something for free, they are willing to sacrifice a lot. Once the marginal 2 cents is added, the power of Free! is not there anymore...

This makes no sense logically for two reasons: Why people would wait so long to get something not worthwhile only because it's free AND the fact that once you increase to 2 cents it suddenly becomes not worth it.

A great example of our predictable irrationality, based on the power of free!